Looking for financial-crisis criminal prosecutions

By Felix Salmon

December 9, 2010

Jonathan Weil and Jesse Eisinger wrote very similar columns yesterday, about the way in which the latest batch of white-collar-crime prosecutions is seemingly an attempt to occlude the fact that none of the main culprits in the financial crisis have been prosecuted of anything. Meanwhile, Janet Tavakoli has come out with a presentation listing just some of the people who might be liable for prosecution here:

Much as I love the idea that Christopher Cox could be prosecuted as an accessory and accomplice, it’s probably easier to start with the bankers. Or maybe “easier” isn’t exactly the mot juste:

By all outward appearances, it seems the Justice Department either doesn’t want to prosecute systemically important frauds, or doesn’t know how. Or maybe it’s both.

It wasn’t always this way. More than a thousand felony convictions followed the savings-and-loan scandal of the 1980s and early 1990s. Some of the biggest kingpins, such as Charles Keating of Lincoln Savings & Loan, went to jail. With this latest financial crisis, there’s been no such accountability.

That’s Weil. Here’s Eisinger:

The most common explanation from lawyers for this bizarre state of affairs is that it’s hard work. It’s complicated to make criminal cases in corporate fraud. Getting a case that shows the wrong-doer acted with intent — and proving it to a jury — is difficult.

The most popular reason offered for the dearth of financial crisis prosecutions is the 100-year flood excuse: The banking system was hit by a systemic and unforeseeable disaster, which means that, as unpleasant as it may be to laymen, it’s unlikely that anyone committed any crimes.

Or, barring that wildly implausible explanation (since, indeed, many people saw the crash coming and warned about it), the argument is that acting stupidly and recklessly is no crime…

Just as it’s clear that not all bankers were guilty of crimes in the lead-up to the crisis, it strains credulity to contend no one was. Corporate crime is usually the act of desperate people who have initially made relatively innocent mistakes and then seek to cover them up. Some banks went down innocently. Surely some housed bad actors who broke laws.

There’s an irony here: the financial crisis was so sudden and so devastating that no one really had the opportunity or incentive to cover up their crimes. Cover-ups are always easier to prove and prosecute than the original crimes, after all. But in this case the crimes all happened more or less in plain sight: Tavakoli, for one, has been shouting “fraud” for years. And the bankers just say “oh no it isn’t” and carry on.

I tend to agree with Eisinger that the doomed prosecution of the two Bear Stearns hedge fund managers does not mean that prosecutions are impossible: it just means that if you’re going to try to prosecute, you’ll need a much more carefully-constructed case than the U.S. attorney’s office managed to cobble together. “You worked in a bank and you went bust” isn’t enough — but with time and subpoena power, it doesn’t have to be.

I suspect that we will see a criminal prosecution of Dick Fuld at some point, although as Eisinger points out it’s certainly taking long enough. A criminal prosecution of Angelo Mozilo is much less likely now that he’s settled his civil suit with the SEC. Stan O’Neal? Chuck Prince? Martin Sullivan? Going after those guys would require a degree of testicular fortitude which simply doesn’t exist anywhere in the Obama administration. There might be a handful of mid-level executives eventually — people higher up the food chain than Fabulous Fab, but well below CEO level. The top cats are sitting comfortably in a cloud of impunity, and they all have very good lawyers.

Several weeks after Merill’s board had named Thain CEO, he was faced with an especially delicate task. Placing a call to his predecessor, Stan O’Neal (who had just negotiated an exit package for himself totaling $161.5 million), Thain asked if they might get together…

Thain knew that if there was one person in the world who could explain what had gone wrong at Merrill Lynch, why it had loaded up on $27.2 billion of subprime and other risky investments — what, in other words, had gone wrong on Wall Street — it was O’Neal.

“Well, as you know, I’m new, and you were the CEO for five years,” Thain said carefully. “I’d like to get your take, any insight on what happened here. Who everybody is, and all that. It would be very helpful to me and to Merrill.”

O’Neal was silent for a moment, picking at his fruit plate, and then looked up at Thain. “I’m sorry,” he said. “I don’t think I’m the right person to answer that question.”

Was O’Neal afraid that anything he said might be used against him in some kind of lawsuit? I daresay he was. He might have been greedy, but he wasn’t stupid.